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Measurement of the Bid-Ask Spread in Equity Option Markets

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  • Michelle A. Danis

    (Office of Federal Housing Enterprise Oversight)

Abstract

This paper develops a joint model of exchange entry and the bid-ask spread in equity option markets. To our knowledge, no other study of spreads in financial markets has incorporated the exchange decision about whether or not to list a security. This allows us to control for the potential endogeneity of the exchanges in a manner consistent with a game theoretic model of entry.

Suggested Citation

  • Michelle A. Danis, 2004. "Measurement of the Bid-Ask Spread in Equity Option Markets," FHFA Staff Working Papers 04-02, Federal Housing Finance Agency.
    • Handle: RePEc:hfa:wpaper:04-02
    as

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    File URL: https://www.fhfa.gov/sites/default/files/2023-04/2004-01_WorkingPaper_04-2_N508.pdf
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    File URL: https://www.fhfa.gov/research/papers/wp0402
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    References listed on IDEAS

    as
    1. George, Thomas J. & Longstaff, Francis A., 1993. "Bid-Ask Spreads and Trading Activity in the S&P 100 Index Options Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(3), pages 381-397, September.
    2. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    3. Toivanen, Otto & Waterson, Michael, 2000. "Empirical research on discrete choice game theory models of entry: An illustration," European Economic Review, Elsevier, vol. 44(4-6), pages 985-992, May.
    4. Patrick De Fontnouvelle & Raymond P. H. Fishe & Jeffrey H. Harris, 2003. "The Behavior of Bid‐Ask Spreads and Volume in Options Markets during the Competition for Listings in 1999," Journal of Finance, American Finance Association, vol. 58(6), pages 2437-2463, December.
    5. Maarten Janssen & Eric Rasmusen, 2002. "Bertrand Competition Under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 50(1), pages 11-21, March.
    6. Michelle A. Danis, 2003. "A Discrete Choice Approach to Measuring Competition in Equity Option Markets," FHFA Staff Working Papers 03-05, Federal Housing Finance Agency.
    7. Stewart Mayhew & Vassil Mihov, 2000. "Another Look at Option Listing Effects," Finance 0004002, University Library of Munich, Germany.
    8. repec:bla:jfinan:v:58:y:2003:i:6:p:2437-2464 is not listed on IDEAS
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